Peloton Interactive, Inc. — Fiscal 2022 First Quarter 10-Q Summary
Business context and reporting period
Peloton operates an interactive fitness platform combining Connected Fitness Products, recurring subscriptions, digital content, software, and commercial fitness equipment. This Form 10-Q covers the three months ended September 30, 2021, compared with the three months ended September 30, 2020. Peloton reported more than 6.2 million Members and 2,491,711 Connected Fitness Subscriptions at September 30, 2021.
Financial and operating metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Total revenue | $805.2 million | $757.9 million | 6.2% increase |
| Connected Fitness Products revenue | $501.0 million | $601.4 million | 16.7% decrease |
| Subscription revenue | $304.1 million | $156.5 million | 94.3% increase |
| Gross profit | $262.7 million | $328.7 million | 20.1% decrease |
| Gross margin | 32.6% | 43.4% | Down approximately 1,080 basis points |
| Operating loss | $359.7 million | Operating income of $68.9 million | Material deterioration |
| Net loss | $376.0 million | Net income of $69.3 million | Material deterioration |
| Adjusted EBITDA | $(233.7) million | $118.9 million | Margin declined to (29.0)% from 15.7% |
| Operating cash flow | $(561.0) million | $312.1 million | Material deterioration |
| Connected Fitness Subscriptions | 2.49 million | 1.33 million | 87% increase |
| Average net monthly churn | 0.82% | 0.65% | Higher churn |
Subscription gross margin improved to 66.7% from 58.5%, and Subscription Contribution Margin increased to 69.6% from 64.1%. Total workouts rose to 120.5 million from 77.8 million, while average monthly workouts per Connected Fitness Subscription declined to 16.6 from 20.7, reflecting the return of seasonal patterns.
Balance sheet, debt, and liquidity
- Cash and cash equivalents were $612.6 million at September 30, 2021, compared with $1.13 billion at June 30, 2021.
- Marketable securities were $311.6 million; cash, cash equivalents, and marketable securities totaled approximately $924.2 million.
- Inventory increased to $1.27 billion from $937.1 million, principally as Peloton built supply ahead of the holiday season and the Tread relaunch.
- The company had $1.0 billion principal amount of 0% convertible senior notes due February 2026, with a net carrying amount of $838.2 million. The notes had a fair value of $882.5 million at September 30, 2021.
- Peloton had a $285.0 million secured revolving credit facility, no outstanding borrowings, and $4.8 million of standby letters of credit. It was in compliance with the facility’s covenants, including the $125.0 million minimum liquidity requirement.
- Contractual obligations totaled $2.34 billion, including $1.15 billion of lease obligations, $1.00 billion of convertible notes, $74.3 million of music-license minimum guarantees, and $111.5 million of other purchase obligations.
Material changes versus the prior comparable period
- Product revenue declined because of fewer Bike deliveries, the reduction of the original Bike price from $1,895 to $1,495, post-pandemic normalization, and supply-chain constraints.
- Subscription revenue nearly doubled because of substantial subscription-base growth and continued retention, although churn increased year over year.
- Connected Fitness Products gross margin fell to 12.0% from 39.4%, driven by lower Bike pricing, higher shipping and delivery costs, Precor commercial-product costs, component costs, and Tread/Tread+ recall charges.
- Sales and marketing expense increased 148.1% to $284.3 million, primarily due to $147.8 million of additional advertising and marketing spending.
- General and administrative expense increased 121.2% to $240.3 million, reflecting higher professional-services, information-technology, acquisition-integration, and personnel costs.
- Research and development expense increased 167.2% to $97.7 million as headcount and product and software-development investments expanded.
- Operating cash flow turned sharply negative, principally because of the net loss and a $332.4 million increase in inventory.
- Precor, acquired in April 2021, contributed to the period’s results and increased manufacturing, integration, and commercial-market exposure.
Guidance, outlook, commentary, risks, and unusual items
- Management described fiscal 2022 as difficult to forecast because of unusual prior-year comparisons, reopening-related demand uncertainty, supply-chain constraints, and commodity-cost pressures.
- Management stated that it would re-examine its expense base and align operating costs with revised growth expectations, while continuing to prioritize accessibility and household acquisition over near-term profitability.
- Peloton lowered the original Bike price to $1,495 and launched the redesigned Tread in the United States, Canada, the United Kingdom, and Germany during the quarter.
- The company expects approximately $400 million to $500 million of capital expenditures over the next 12 months, primarily for manufacturing and supply-chain investments, and believes available liquidity will fund working-capital and capital-expenditure needs for at least the next 12 months.
- The Tread+ and Tread recalls resulted in an $11.4 million revenue reduction, $0.5 million of logistics costs, and a $31.1 million recall-related return reserve at September 30, 2021. Additional costs may include returns, inventory write-downs, logistics, subscription waivers, repairs, product development, and legal and advisory fees.
- The Tread+ recall followed reported injuries, including the death of a child. CPSC, DOJ, DHS, and the SEC were investigating related matters, and the company faced securities class actions, shareholder derivative actions, personal-injury claims, and other litigation. Peloton had not established reserves for these proceedings because potential losses were not considered probable and reasonably estimable.
- Peloton recorded $26.5 million of litigation and settlement expenses, $12.9 million of recall-related adjustments, and $3.1 million of Precor transaction and integration costs in its Adjusted EBITDA reconciliation.
- The company’s disclosure controls and procedures were not effective at September 30, 2021 because of a previously reported material weakness involving inventory-counting and inventory-reporting controls. Remediation was in progress and had not yet been completed.
- Key ongoing risks include demand normalization after the pandemic, supply-chain disruptions, excess inventory, product safety and recall exposure, dependence on Bike sales, music licensing obligations, competition, international expansion, foreign-exchange movements, litigation, cybersecurity, and the company’s continuing operating losses and cash burn.
Important facts for investors to verify
- Whether management’s planned expense reductions and revised growth expectations improve operating losses and Adjusted EBITDA.
- Whether product demand, Bike pricing, supply-chain costs, and inventory levels support recovery in Connected Fitness Products gross margin.
- The pace of cash consumption, capital expenditures, and remaining liquidity relative to the $1.0 billion convertible notes due in 2026.
- The ultimate costs, timing, and regulatory outcomes of the Tread and Tread+ recalls and related litigation and investigations.
- Whether the inventory-control material weakness is remediated and disclosure controls are determined to be effective.
- Whether subscription growth and improved subscription margins offset higher churn, lower engagement per subscription, and continued content and music-licensing costs.